Can the Fed Save the (Financial) World?

Roger Altman, former deputy secretary of the Treasury, thinks so:

"Today, regulatory authority is divided among the Federal Reserve,
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, the Office of Federal
Housing Enterprise Oversight, the Securities and Exchange Commission,
the Commodity Futures Trading Commission, state banking regulators and
state insurance regulators. That’s too many players.

What’s more, this balkanized system supervises only half of the
relevant financial universe. It neglects investment banks, hedge funds
and institutions like mortgage companies that issue asset-backed
securities. The assets of these unregulated entities total about $10
trillion — which is the same amount we see on the regulated side.

The unregulated institutions pose particular risks because they are highly leveraged and financed primarily through short-term money markets rather than customer deposits. And unlike big banks, many of them do not disclose their finances to the public."

If taxpayers are going to be on the hook for the bailouts, than we should be able to set the parameters of what is allowable in terms of capital minimums and leverage.

Yes, this is regulation. No, this is not a Free Market policy. But neither was the bailout of Bear Stearns, nor the Housing Bailout, nor the imminent bailout of Fannie and Freddie and maybe even FDIC.

"The Bear Stearns case vividly illustrated the dangers that come with lack of regulation and transparency. Although Bear Stearns carried $300 billion in liabilities, it was not supervised by the Fed. When it began to fail, the Fed correctly judged that the system might not withstand the shock and arranged a rescue. But suddenly, the Fed was standing behind both the larger banks it regulates and the major investment banks it does not. This cannot continue.

The next president must first create a single framework for the major financial borrowers, administered by the Federal Reserve alone. This wider regulatory umbrella should be more conservative. In particular, the minimum levels of capital and liquidity that financial institutions are required to maintain should be higher than they have been in recent years. And the institutions should put in place better and more detailed systems for reporting — internally as well as to regulators and the public — on all the risks they are taking."

Beware the false dichotomy that many pundits present when it comes to these issues. The choice isn’t between regulation and no regulation — its between Federal Bailouts or no Federal Bailouts.

You want the bailout? You take the regulation with it. Otherwise, don’t ask the Fed or Treasury or Congress for help, you disingenuous phony free market hypocrites . . .


How the Fed Can Fix the World
NYT, September 2, 2008

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What's been said:

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  1. NOah commented on Sep 3


  2. VoiceFromTheWilderness commented on Sep 3

    One of the signs that the financial mess hasn’t hit bottom is that there are still people, plenty of people, who are trying to use the current problems as ‘proof’ that that ‘the system’ needs to be changed.

    There is nothing as disingenous, and fact free, as the attempt to spin the current financial crisis as the fault of the regulatory structure we have. The regulatory structure we currently have is only the outer shell of the one we used to have. it has been completely eviscerated over the last 30 years (but particularly the last 10 or so) so that the system completely fails to perform the duties it was meant to perform. Attempting to advance the claim that the resulting financial mess is the fault of the old structure is simply absurd.

    What these times have made astonishingly clear, and not just in financial regulation, is that the system is only as good as the people who compose it. We can take any ‘system’, and staff it full of people who refuse to cooperate with that systems function. The result is breakdown of that system.

    The point? Changing the structure of the financial regulation arm of the US Government is completely meaningless, because it doesn’t address the problem. There are plenty of laws on the books, the problem is a culture (both within the government and outside it) that regards breaking the law as completely acceptable — as long as you are rich enough, or powerful enough, or connected enough. The problem is enforcement. The problem is prioritizing values: what’s more important the stability of the country, and it’s financial system, or the profits of a few? The problem is willingness to see in the present what the consequences will be. It’s been obvious for a bunch of years now that we were headed for trouble, and smart people have warned of it. But the federal government refused to enforce laws on loans, stock trading, disclosure etc. The government has been captured by the interests of a very select few, and no longer operates in the interests of the general public. How exactly is creating a vast new infrastructure going to solve that problem? Me thinks it will look like a solution even as it hides the problem better. Oh and creates even more power for friends of industry to help out there personal best friends.

  3. Uncle Jeffy commented on Sep 3

    “…you disingenuous phony free market hypocrites . . . ”

    Where I come from, that’s known as “calling a spade a spade.”

  4. VoiceFromTheWilderness commented on Sep 3

    Out Long National Nightmare of Peace and Prosperity, brought on by a balance between the interests of the market and the interests of the public, is … Over.

    Praise the Lord, Pass the Ammo

  5. riverrat commented on Sep 3

    RIGHT ON BARRY!!!! Keep on doin what you do man! This needs to be said LOUD and OFTEN!

  6. Jeff M. commented on Sep 3

    @Voice: Amen brother. Amen. You hit the nail squarely on the head. This is at least partly a cultural phenomenon of “getting mine while I can at any cost”.

  7. wally commented on Sep 3

    There is another trade-off not mentioned there. The interests of the ‘financial system’ is often taken to mean the interests of the big banks and investment houses. Those interests are often at odds with those of smaller banks, of industry and of the individual. Ultimately, a presidential election would simply become a contest for the control of money. That is not only uncomfortable, that is the road to a ruinous and violent end to American government.
    The divergence of interest is bad enough already. To worsen it and institionalize it is disaster.

  8. Eric commented on Sep 3

    I don’t know why everyone is so happy about this post. Cramer has already written this year that “lower interest rates are a true panacea.” And since **NOBODY** called him on it, I can only assume that they find at least some merit in the notion.


    BR: That would be a bad assumption on your part. The pros don’t take Cramer all that seriously any more.

    A well known fund manager said to me recently: “He’s morphed into Dan Dorfman.”

  9. Mike M commented on Sep 3

    The Fed and its banking system are the CAUSE of the problem. How can the cause of the problem also be the solution? I guess it is a lot like the great Homer Simpson once said, “Alcohol, the cause and solution of all of life’s problems!”

  10. JillsLeftTeat commented on Sep 3

    We have entered the “obsolescence” in the continuum of “planned obsolescence”.

  11. Namazu commented on Sep 3

    Nowhere have I seen a detailed scenario for a hypothetical NON-bailout of Bear Stearns. Was this option truly unthinkable for society at large, or merely to the Wall Street perspective so well-represented in the decision loop? As the costs in moral hazard are felt for years down the road, I hope we can get a clear-eyed look at both sides of the ledger.

  12. flow5 commented on Sep 3

    Nationalize the banks.

  13. DL commented on Sep 3

    I’m for minimal regulation, but maximal disclosure.

    If there had been adequate disclosure of what was really in these mortgage backed securities, and transparency with regard to the ownership of the credit default swaps, little additional regulation would have been needed. If a hedge fund manager really wants to buy securities backed by “NINJA” loans, that should be his prerogative, as long as it is easy to determine that is indeed what he is buying. (Of course, those who fail to meet their disclosure obligations should be criminally prosecuted).

  14. nato commented on Sep 3

    Read a book on the history of the FED. One of the themes in The Creature from Jekyll ISland is, ‘The Name of the Game is Bailout’. Look at recent history. Bankers need to be bailed out b/c they are in too deep to get out. This cycle repeats, albeit more frequently recently.

    Who foots the bill in this ‘free’ market? The taxpayer.

    This instituion, created by private banking interests,wants to be the main regulator for everything?

    I am not an end of the world guy or a conspiracy theorist, but when an institution without the manpower or expertise will be the overseer of ‘everything financial’ in the US, I tend to get a tad paranoid.

    A quasi-private, non-government institution controlling the money? What a DANGEROUS concentration of power.


  15. dan k commented on Sep 3

    Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Securities and Exchange Commission, the Commodity Futures Trading Commission.
    Yeah, kind of like Homeland Security – shove than altogether and it will be so much better (whats the words – synergy – efficiencies of scale – etcetera)

  16. larster commented on Sep 3

    Not only do we need regulation, but we need an administration that will use the powers. Check out the latest bank failure and see how much of their capital base they loaned to one individual. If no one looks, you can have all the regulation in the world and it will not make one iota of difference.

  17. PrahaPartizan commented on Sep 3

    Those who vociferously support the doctrine that current regulatory structures caused this debacle must also support black-mail. That is what the doctrine of “too big to fail” boils down to. I make my enterprise so large that everybody else in my society agrees to support my lifestyle and my personal profits or else I pull the trigger and kill everyone. It’s total societal black-mail. We’re in the process of nationalizing the entire financial system and the taxpayer should not be left with only the task of cleaning up after the elephants have stampeded through the markets.

  18. dwkunkel commented on Sep 3

    DL has the right idea. The only regulation really needed is to require and enforce complete financial transparency.

  19. Mark commented on Sep 3

    Fact check: Taxpayers being “on the hook,” or “footing the bill,” for bailouts are very different things from them actually paying those bills off.

    Let’s be honest, it’s not like the U.S. taxpayers are going to receive a payment booklet that keeps them on schedule and in the end results in the satisfaction of the note holder.

    There are any number of lessons in history that are analogous to our nation’s financial circumstances. The only way to retire debt of this magnitude is inflation…and that’s not what’s happening.

    What is happening: Markets? Down. Home prices? Down. Commodities? Down. Oil prices? Down.

    Google news for “deflation” versus “inflation” and you’ll see just how deeply we have our collective ostrich head stuck in the sand.

    And so, the punch line: what historically happens to payment of enormous national debts when deflation rules? That, my friends, is left as an exercise to the reader.

  20. algernon commented on Sep 3

    Your use of ‘free market’ as an adjective describing your ‘hypocrits’ is illogical. There is nothing free market about someone asking for a bail-out from the gov’t.

    Nor is there much free market about a faith-based monetary system continually manipulated by a gov’t bureau (the FED).

  21. BIll commented on Sep 3

    People are clueless. They want to give the Federal Reserve all this regulatory power. The FED is a private institution whose shareholders are the banks. Don’t the words conflict of interest or moral hazard ring a bell. Oops, I forget that is what Washington is built on nowadays.

    Disgusting, I agree with the poster who said it is about enforcement, not new laws.

  22. Unsympathetic commented on Sep 3

    Before giving the Fed one ounce of additional power, I want metrics that show the Fed regulators are competently using the powers they already have.

    The Greenspan ideological puritanism of “the best regulation is no regulation” has come back to bite everyone square in the moneymaker, and now we find that the wrinkly one was completely wrong.

    Reinstate Glass-Steagall and the Chinese Wall before considering changing the current structure.

  23. AGG commented on Sep 3

    The “system” is gamed. The laws which comprize the teeth of the system are applied selectively. The laws which provide loopholes are even more selective. There are TWO premises here, not one. The loopholes should be flushed (don’t hold you breath) while the laws shold be enforced accross the board. I think every honest person would aggree that a level playing field would benefit our economy. The twisted language that talks about the “economy” as if the financial sector was the be-all end-all of the economy is just more flim flam.
    As to the inflation, deflation situation, I think they are inflating. The lack of demand for a lot of normally hgh priced goods makes deflation appear as a possible scenario but deflation, like inflation, is really a monetary phenomenum. The government has taxing power so that provides implicit collateral for inflated dollars. The bond holders are stuck with bonds which are depreciating due to “below inflation” returns because other types of equity have lost demand.
    Watch the COLA raise announcement for 2009 coming in October. They are going to go as low as they can. If they overshoot and go too low, the bond holders of TIPS will bolt and other bond vigilantes will dump US bonds for foreign. So the Fed is walking a tightrope trying to convince sovereign wealth funds to stay here while bilking the masses through inflation. The “bailouts” were and are simply the “haves” taking care of their own. All the rest is bullshit.

  24. Phil commented on Sep 3

    Just as the teachings of Christ have been distorted to fit the institutional egos of the distorters, so have the findings of Kondratieff been similary abused. If you consider that finance has become a veritable religion, the analogy is perfect.

    Und so: the k-cycle is considered a wave cycle of reasonably fixed length periods. That is the error. While hardly an original thought, it is the fact that the k-cycle periodicity is tied directly to the average human life span for the era in which one is measuring. This is because Kondratieff was describing a generational human behavior pattern more than anything else.

    The result of which is that cause and effect are inversely situated in the minds of the participants. What the fed has done, the moral hazard of cheap money for anybody, was, and is, not an issue of regulations or the lack thereof. They could not have done other than what they did because the behavior of the time demanded it. Now we get the deflation because that is what *must* happen: behavior is changing to it and all that follows will be as one would expect to see it.

    Regulation, or lack thereof, is the cart following the horse. Hypocrisy is not even a consideration by those that stand to suffer the most from deflation. Both bailouts and increased regulation are inevitable. And inevitably, these new regulations will be dismantled in the future. That’s the big picture.

  25. bugly commented on Sep 3

    That last sentence is beautiful distillation of the argument and I agree with you One Quadrillion Percent!

  26. brion commented on Sep 3

    “Just as the teachings of Christ have been distorted to fit the institutional egos of the distorters, so have the findings of Kondratieff been similary abused”

    So why crucify regulation? Because overreaching corporate greed and hubris are inevitable?

    Don’t you think Kondratieff’s waves could be interrupted and regulations remain enforceable if we could just deport enough republicans to some far off klepto-fascist hellhole of their own?
    Remember, regulations exist because someone, at some point in time, lied, stole, cheated…..
    and just why are Republicans always calling for the removal of evil ‘Regyoolayshuns!”?
    Oh yeah. Because they “interfere” with the “genius” of capitalism.

  27. Steve in Fly-Over Land commented on Sep 3

    Speaking as one of the “free-market nuts” out here let me respectfully disagree.

    Let’s see, we have a hoplessly confusing regulatory mish-mosh which has created this problem, so of course the only possible solution is a new and even more confusing regulatory mish-mosh.

    As I recall, it wasn’t debt holders or shareholders of Bear Sterns that decided to put the taxpayer on the hook for thier losses; it was the Fed. (Doubtless they love being made whole, but they didn’t have the power do it on their own.) As long as people are allowed to engage in risky transactions, keep the gains and pass the losses on to the taxpayer you will get more risky behavior.

    I don’t what I find worse about this post, the fact that you seem to defend a terrible idea, or the fact that you claim it’s needed to protect us all from ‘free markets’. What we need is protection from is the regulators who keep providing cures that are worse than the problem.


    BR: Which regulatory mish mosh had banks making 125% LTV loans?

    How about all of the NINJA loans (No income No Job, No Asset) mortgages — what regs required that?

    Piggy back loans, no money down mortgages, I.O loans — what regulatory scheme required that?

    Face it — there was a dearth of supervision, and now we are all paying for cleaning up the mess.

  28. JIMB commented on Sep 3

    Choice is between Fed or no Fed, after all, it’s the Fed that creates the bubbles.

  29. Bob commented on Sep 3

    The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.
    -Thomas Jefferson (3rd President of the United States. 1743-1826)

  30. SeamusAndrewMurphy commented on Sep 3

    What dear Flyover Steve fails to recognize is the clique of “debt holders or shareholders” that use their influence to demand….er…manage the bailout process. And it is most definitely the lack of regulatory tooth and enforcement that allows for institutions that are too big to fail. It is disgusting that such are ever allowed to exist. Blackmail is the proper term.

  31. Bill commented on Sep 3

    Personally, I’d prefer not to have the bailouts OR the regulation. Another thing I’d rather not have any longer is this blog. You can take your nanny-state, big-government, Hillary-and-Obama-know-best, statist, collectivist, FAILED policies and SHOVE THEM WHERE THE SUN DOESN’T SHINE. The URL of this blog will never darken my browser again and good riddance. Your posts used to be at least readable. When did you become so unhinged?

  32. Fred S. commented on Sep 3

    Regardless of the regulatory apparatus the enforcement of the rules is most important. How about a SOX type sign-off from the BOD, CEO, CFO, the rating agencies, the originators etc. of whatever it is they are engineering. Or change the SOX so that it incorporates any debt issuance of any kind. We need to get rid of the shadow banking system, SIV’s, and the concept of ‘regulatory arbitrage’. Some sense of Fiduciary accountability needs to be in force.

  33. ben commented on Sep 3

    The Fed save us? Please., the last great idea they had was to try to inflate our way out of the financial market turmoil. Now they have some sort of excuse not to raise rates because of the correction in commodity prices.

  34. Dave commented on Sep 3

    This whole disaster was created because of one word. That word is GREED!

  35. jojo commented on Sep 4

    “Personally, I’d prefer not to have the bailouts OR the regulation”
    Gonna miss yer “blunt instrument” Bill….
    While you are out amongst us perfecting your Libertarian utopia see if you can get those pesky traffic lights removed too will ya?
    I got places i have to GET to in the mawnin’

  36. Francois commented on Sep 4


    Your post rules! You nailed it perfectly.

    “It’s the people, stupid!”

  37. Francois commented on Sep 4

    DL wrote:

    “I’m for minimal regulation, but maximal disclosure.”

    Alas, how can one get disclosure without regulation? It’s a shame, but human nature being what it is, it can’t be.

    Those who run and manage corporations (institutions too btw) love to have as much freedom and power as possible. Control of the information is a powerful way to achieve that.

    On the other side, the public need to be informed as much as possible, if anything useful is to be done fairly in a transaction with corporations.

    It is a perpetual tug of war that only a smart and tough referee can control. And that means the Law and its enforcers needs to be available, just in case someone should display too much resistance against the common good.

    And that calls for…regulations.

  38. Brian commented on Sep 22

    The problem is there is no liquidity crisis, just a crisis where banks didn’t diversify their investments and thus took gambles like Enron employees were forced to take with thier retirements.

    If the banks have mortgages, assets, and other collateral, there is an open market which will surely absorb these assets at what would be deemed a fair price.

    If the government is going to over-pay, I want to hear it first hand. In fact I would like the proposal to be put on the ballot. And next to it a comprehensive balanced budget ammendment proposal that would compell the government to introduce and vote on a balanced budget ammendment.

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